Fragmentation and multinational production

This paper examines the consequences of falling transport costs for intermediate goods, and shows how this leads to the spatial fragmentation of production. As firms divide their production between countries they become either vertical multinationals (if upstream activities are labour intensive) or horizontal multinationals (if downstream activities are labour intensive). In the former case the volume of world trade increases, and in the latter it falls. Fragmentation need not narrow international factor price differences, which depend on the factor intensity of the activities that relocate.